Following the Budget last week, a couple of interim changes are being introduced to pensions today, ahead of a bigger change in April 2015.
Firstly, the maximum income level for capped income drawdown is rising.
It goes up from 120% of GAD to 150% of GAD, allowing investors using capped drawdown to withdraw more income each year from their pension funds.
GAD rates are Government Actuary’s Department tables and these are used, along with the investor’s age and size of their pension fund, to calculate the maximum income level from capped income drawdown each year.
Moving from 120% GAD to 150% GAD is an interim measure before income limits are removed entirely on 6th April 2015.
Existing investors using capped income drawdown will not see this higher maximum income limit applied automatically; they will need to wait until their next policy anniversary or request a review from their product provider.
In any case, it is probably not advisable to withdraw the maximum possible from your pension fund, as the rate of depletion will be very fast and this is likely to leave you without a pension income in later life.
The other pension rule being changed today is a reduction in the Minimum Income Requirement for flexible income drawdown.
Today sees this Minimum Income Requirement reduced from £20,000 to £12,000.
Once £12,000 a year of pension income has been secured, investors using flexible income drawdown can make income withdraws with no upper limit.
It is worth noting that these income withdrawals are subject to income tax at your highest marginal rate and, as with high withdrawals from capped drawdown, it is possible to deplete your pension fund and run out of money in later life.
With increased pension flexibility comes the need for good Financial Planning.
Our LifeWealth Design service uses lifetime cash flow forecasting to help investors understand what they can afford to draw from their pension funds and what they need to invest to achieve their goals in life.
The freedom to withdraw more income from pension funds is great, but the ability to do this does not necessarily make it the right thing for individual investors to do. Seek advice before stripping high levels of taxable income from your pension funds.
